Robert Mcdowell

Marc Faber: 'It Will All End in Disaster'

The Economy War: Hey, trust me, it'll all be over by Christmas, f'sure!
Then the real work starts - finding jobs for the millions of "hard-working families" (the blue-collars and middle class that politicians love to represent) who ain't got jobs or spare assets to sell.

Get the 'can do' and 'yes, we can' entrepreneurial spirit back into gear and sho' 'nuff the taxes won't rise and the Federal assets & liabilities will all balance off and the budget deficit will be cut in half by 2012 or maybe even earlier just like President Obama promises.

It's got to be better we all believe that for now and stop anxiety-griping and mad-frothing about political theology.

Hitting Bottom Is Inevitable, Subsequent Growth Is the Real Concern

There is a parsimonious view that bottoms are false bottoms if they have a lot of federal sponge padding. But, padding helps to make hitting the floor comfortable plus adding a little spongiform bounce. Until now the focus has been to restore confidence in the banks in terms of their capital reserves and finance for their 'funding gaps'. But, while that should start restoring some weight to banks' share values, there is a big fear that banks' own internal confidence has been so shot to pieces they wouldn't know when to respond positively to the economy turning round and heading north.
Banks historically overshoot the recession cliff - like the cartoon characters running off the cliff who only fall the second after they look down. They are also several quarters late traditionally in responding with new loan growth to economic upturn. They spend the first 2-3 quarters of recovery taking profit in deleveraging, almost like assuming recovery is just a dead cat bounce. If government doesn't nationalize it can at least try and force the banks to be anit-cyclical right now and be immediately pro-cyclical once recovery is happening. How do we know when that is?
Well, let's assume recovery as it zigzags forward as usual is here when the next lows start being higher than the last lows and the next highs exceed the last highs.

Geithner's Financial Reform Is Doomed to Fail

When the impaired RMBS and structured credit derivatives ($1.4tn current watchlist at top 6 US banks) are write-down discounted by the CDS rates plus haircuts, the yields on these assets rise and are looking good (many of them at 17%). Then when the credit enhancements and standby liquidity is factored in plus the amortization going on that rapidly will improve their quality, plus now too the FDIC, FM&FM, insurance guarantees and loan-contracts restructuring, plus Fed's liquidity window and Geithner Plan deals for $500bn to be auctioned off - then even with further credit defaults in the pipeline the upside opportunity outweighs the downside risk considerably, enough to make this relatively secure vulture territory.
But, I think these risk/reward oportunities should be fed not to 'market-makers' but to the underlying distressed mortgage borrowers by severely cutting their mortgage debt by whatver the RMBS are auction-discounted for. That way the circulation in your graphics above include Main Street.
Hedge funds should get real and go for conventional vulture fund plays and/or look again at the risk/reward of financing big banks' 'funding gaps' by buying MT Notes and Covered Bonds at good interbank rates when the Fed Rate is so low and inflation is heading down. The banks are making enough internal capital despite continuing loss provisions to be sound payers and to guarantee respectable signle-digit returns.
The macro-funds and others are expecting to make 17-25% returns from the Geithner Plan? And that again will make the banks jealous they're not on the buy side, only the sell-side. They'd loan-finance som good margin private deals for asset swap repos in support of medium term financing for their 'funding gaps'.
But while banks and hedge funds may think long term about relationship building for when recovery returns, the banks should be thinking more about how to repair their relationship with Main Street and make sure their distressed customers get some of the payola of these TARP/TALF/Geithner Plan 'save the bank' dealings.

Can the Hedge Fund ETF Actually Deliver?

Hedge funds should look again at the risk/reward of financing big banks' 'funding gaps' by buying MT Notes and Covered Bonds at good interbank rates when the Fed Rate is so low and inflation is heading down. The banks are generating enough internal capital despite continuing loss provisions and write-downs to be sound payers. The returns are respectable and at least positive.
The macro-funds are feeling really bullish however for vulture fund strategies and leveraging The Fed and FDIC or surfing off the back of the Geithner Plan deals to seek 17-25% returns on the banks' fire-sales? The deals look so good some banks would wish they were on the buyer side not the forced seller side. I bet some banks would produce good margin private deals for asset swap repos in support of medium term financing for their 'funding gaps'. Hedge funds should think longer term about relationship building with the banks and not overtly exploiting the banks' current embarassments. When recovery returns the hedgies will want positive relationships with the big banks to leverage off.

Big Banks: Pulling Off the Ultimate Bait and Switch

Sure the banks are 'insolvent' if having their capital wiped out means that. But there are various ways of measuring insolvency. Problem is what to do when in aggregate all banks are having their capital wiped out twice over, once by the credit crunch and again by the recession? The government is replacing 1 X bank capital ($1 trillion) so that the banks can maintain lending in the recession to supplement the fiscal stance (worth maybe 4% GDP boost when 6% is needed to get recovery happening). Banks need to recover another 1 X capital this year. Over 2 years they raised 0.5 X capital and are generating half as much again from underlying net interest profit on traditional banking. They also face problems in refinancing their 'funding gaps' betweem customer loans and deposits and some international withdrawel from US banks' MT Note and covered bond programs (medium term financing). The Geithner Plan is starting with $500bn of assets to be auctioned off at maybe 40% write-down discounts. But, that still leaves banks needing to access the short term money market window at the Fed for a couple of $trillions.
Legal firms are collecting class action groups of shareholders to sue banks over misrepresenting their balance sheets. Why don't they or the investment banks or the Fed or FDIC or Fannie Mae and Freddy Mac collect large groups of distressed mortgagees and let them into the market for buying the banks' impaired RMBS instead of the hedge funds (who are seeking minimum 17% returns on the Geithner Plan). Remortgage money should buy the sub-prime and Alt-A RMBS at substantial discounts and use that to cut the mortgage debts of borrowers and thereby also cut their negative equity overhangs. That way, Main Street wins something in place of the Wall Street hedgers who made plenty shorting the banks and shouldn't be further rewarded by Fed loan subsidies plus exit clauses to profit from banks' fire-sale deals.
Private funders should take their lead from the Fed and maybe through government guarantees for the big Money Market Funds provide 'funding gap' financing and gain more normal profits instead of looking for big kills for vulture fund strategies?

Mark-to-Market Accounting: FASB Responsive, But Not Independent

Fair value accounting presumes there are fair value markets, but only if you abandon the idea that fair value is a price between willing sellers and willing buyers. Fair value quality of markets requires a balance of plenty of buyers and sellers in the markets. Legal firms are collecting class action groups of shareholders to sue banks over misrepresenting their balance sheets. Why don't they or the investment banks or the Fed or FDIC or fannie Mae and Freddy Mac collect large groups of distressed mortgagees and let them into the market for buying the banks' impaired RMBS instead of the hedge funds (who are seeking minimum 17% returns on the Geithner Plan). Remortgage money should buy the sub-prime and Alt-A RMBS at substantial discounts and use that to cut the mortgage debts of borrowers and thereby also cut their negative equity overhangs. That way Main Street wins something in place of the Wall Street hedgers who made plenty shorting the banks and shouldn't be further rewarded by Fed loan subsidies plus exit clauses to profit from banks' fire-sale deals.

In Private/Public Partnership, Why Not Let the People In?

The distressed mortgagees should be allowed in. If their mortgages are being discounted in the sale of pooled securitized assets, why not factor that discount back into the renegotiated mortgages thereby cutting back the negative equity risk.
Closing the loop to help Main Street could be a lot more direct. The pooled mortgagees could be remortgaged and that money used to buy their mortgage debt at up to maybe 30-50% discounts. This is the surest way of cleaning up toxic ABS and most everyone wins even if the banks still take a hit, but a normal recession-scale hit.
See: mcdowellsobamanomics.b...

High Sector Correlation Provides Slight Encouragement

Good charting - this is typical of well into recession periods when all risk factors correlate to 1 because all are subject to too many domino or systemic impacts to count. As Swampfox says "...non-systemic risk is reduced. All assets become more correlated with "the market". But this is not dependent on government taking significant ownership - happens in all crashes. All the widely different downward trajectories narrow and gather together on the floor but when they recover they separate again - some will rise steeply, others zigzag, and some others rise slow.

Preview from Europe: The Horror Show's Alive and Well

Europe feels pretty good. The continentals have had high unemployment rates for a while. Ireland is staring at a 6% recession this years but got its AAA confirmed. UK is ahead of the curve heading for less than 3% GDP drop maybe, but 8% unemployment, while Government is solid in how it'll be making £ billions out of helping out the banks by filling in their 'funding gaps'. The Germans and the French are coming on-message. The Euro Zone economy may revise its GDP in hindsight up, not down and find its got a lag before the full recession hits them by which time USA and UK will be back in positive growth. Sure, trillions of assets have gone south, but underlying net interest income of banks is holding up well, and assets can always come back even if they take 5-6 years to get back up to same cliff-edges where they fell off last year. Short-sellers are staring at postage stamp bank share values and getting real nervous that the great days of bear market profits are now getting harder to pick. Good time while the US$ is high to book your holidays over here - I recommend Scotland for the Edinburgh Festival in August and the Mediterranean for September.

Will Taxpayers Profit from Newest Bailout Plan?

Sheila Bair is as sharp and clever as any. And guess what, sure she's exactly right, taxpayers (and non-taxpayers too) are going to make out of this. Check out the Federal Budget - see any $trillions of tax-dollars being given to the banks except maybe some piddly TARP stuff - no! The $trillions in federal, Fed and Treasury financing are off-budget, not using up your tax dollars, not even adding to the national debt! Government financing for US banks (and in UK and other countries too) is double-entry book-keeping swap deals, financial assets and fees for treasury-bills and insurance guarantees - with a wide margin (writedown discount ceilings) so that Government is guaranteed (as good as can be) to make $mega-billions back over next 3 years. How? In effect Government is stepping into a profitable role (that was a private sector monopoly of funding banks 'funding gaps' vacated by jittery private funding sources who decided they'd prefer to wait for fire-sale deals) and government is getting 600-900bps coupon, that's $90-120bn on $1.5tn plus fees. I estimate before we're through the Government stake will hit closer to $6 trillions, enough to pay for (when brought on-budget) at least half of annual Federal deficits. On top of that there should be some equity gains by 2010 or 2011, and of course the indirect boost to the general economy by stopping big banks deleveraging on loans to households and businesses by say 10% is oing to speed up recovery and generate more tax than otherwise without higher tax rates. If we think too much cynically that banks and big corporates via government always get one over on everyone then we're still in the Bush years. These are now Obama years and there's a bit more, maybe a lot more, ethics at work here!

Reconnecting with Economics

Sramana,
Don't discount Obama or his team - this is not about business sense but economic sense - the two are not aligned and should not be - the economy is not the sum-total of business, but much bigger than that. The moral hazard idea: rewarding big banks for failure - this is not what's happening. Big banks are a public service at the heart of all of the economy, not like any other business sector. The failures have been in the markets, regulatory system, government, among borrowers, in the culture and silo-mentality of banking & finance, in shadow-banking i.e. the failings are widely shared and very widespread. They also go to the extreme trade imbalances and how these have been financed through selling net financial assets to trade surplus countries. As for the bankers - they will all have to pay; very few of the pre-crisis board members will still be at the top tables by the end of the crisis.

Banks Say to Regulators: You Can Have My Hide - Just Let Me Live!

Like Keynes said "in the long run" life is like an "unedited dictionary blurb"
that gets edited by the courts if you're unlucky in love,
or by an obituary column if you're lucky at cards!

European Bank Downgrades To Accelerate - S&P

The S&P downgrades of banks' credit ratings - of those that benefit from government guarantees and shareholdings is very dubious and counter-intuitive. The basis of doing so too, based on latest GDP recession estimates, is unsafe given that these figures are advisory or temporary, and will be severely revised for up to the following 2 years e.g. just like when the US data was revised to show recession began in Dec.07 not mid-08, just as UK is likely to revise its recession start back to beginning July 08, while Euro zone figures are likely to be revised upwards to show recession starting not back end of last year but end of this year, 2009, or even mid-2010? UK banks' default rates are much lower than in the USA despite the UK banks' US exposures. S&P is downgrading banks to the point where they lose their unsecured borrowing grades and that is unrealistic while at the same time undoing all attempts to get interbank lending flowing more freely at lower spreads.

European Bank Downgrades To Accelerate - S&P

The S&P downgrades of banks' credit ratings - of those that benefit from government guarantees and shareholdings is very dubious and counter-intuitive. The basis of doing so too, based on latest GDP recession estimates, is unsafe given that these figures are advisory or temporary, and will be severely revised for up to the following 2 years e.g. just like when the US data was revised to show recession began in Dec.07 not mid-08, just as UK is likely to revise its recession start back to beginning July 08, while Euro zone figures are likely to be revised upwards to show recession starting not back end of last year but end of this year, 2009, or even mid-2010? UK banks' default rates are much lower than in the USA despite the UK banks' US exposures. S&P is downgrading banks to the point where they lose their unsecured borrowing grades and that is unrealistic while at the same time undoing all attempts to get interbank lending flowing more freely at lower spreads.

The U.S. Debt Quandary

Your figure of $125,000 for Government Debt per person in USA is out. The population is 301 millions. As of November 19, 2008, the total U.S. Federal debt was $10.6 trillion = about $35,200 per capita (that is, per U.S. resident). The October 3rd, 2008 bailout bill (H.R.1424), section 122, raised the U.S. debt ceiling from $10 trillion to $11.3 trillion. But, $5 trillions is debt internal to Government = between Government accounts.
Roughly $6.3 trillion is owed externally to Government over many years = £20,900 per person resident in USA or about $55,000 per household. But, non-Government private sector debt is about $37 trillion owing by business and households = $122,900 per person, or $323,200 per household. All these debts have offsetting wealth holdings and the debts will not be a burden on all equally. Some commentators add in unfunded debts looking forward decades that are paid out of each year's Government revenues (about 25% of which is taxation earned annually on Government's own spending) e.g. Medicaid, Social Security, Medicare, veterans' pensions, and similar obligations, this figure rises to a total of $59.1 trillion, or $516,348 per household In 2007, the public debt was 36.9% of GDP, with a total debt of 65.5% of GDP. As a % ratio to GDP US Federal debt is only the 27th largest. Why should this be a worry?